A GUIDE TO SETTING UP AND USING YOUR LAWYER TRUST …

A GUIDE TO SETTING UP AND USING YOUR LAWYER TRUST ACCOUNT

Published by 2016

Oregon State Bar Professional Liability Fund

16037 S.W. Upper Boones Ferry Road, Suite 300 Tigard, Oregon 97224 P.O. Box 231600 Tigard, Oregon 97281

503-639-6911 1-800-452-1639

2016 Board of Directors and Officers Robert D. Newell ? Chair ? Portland Teresa A. Statler ? Vice Chair ? Portland Tim Martinez ? Secretary-Treasurer (Public Member) ? Salem

Julia I. Manela ? Eugene Dennis H. Black ? Medford Saville W. Easley ? Portland Robert S. Rachio ? Canyon City Mary Jo Mullen ? Portland Tom Newhouse (Public Member) ? Portland

Chief Executive Officer Carol J. Bernick

Director of Personal and Practice Management Assistance Barbara S. Fishleder

Practice Management Advisors Beverly Michaelis Sheila M. Blackford Jennifer Meisberger Hong Dao

IMPORTANT NOTICES

This material is provided for informational purposes only and does not establish, report, or create the standard of care for attorneys in Oregon, nor does it represent a complete analysis of the topics presented. Readers should conduct their own appropriate legal research. The information presented does not represent legal advice. This information may not be republished, sold, or used in any other form without the written consent of the Oregon State Bar Professional Liability Fund except that permission is granted for Oregon lawyers to use and modify these materials for use in their own practices. ? 1986, 1994, 1999, 2003, 2005, 2009, 2014, 2016 OSB Professional Liability Fund.

Professional

OSB Liabi l ity Fund

CAROL J. BERNICK

CHIEF EXECUTIVE OFFICER

March 2016

Dear Oregon Lawyer: This edition ofA Guide to Setting Up and Using Your Lawyer TrustAccountreplaces the green-

covered handbook ofthe same name previously published by the Professional Liability Fund in 2014. This handbook was created to help you understand and fulfill your ethical obligation to protect

the funds and property ofyour clients, pursuant to Rule 1.15 ofthe Oregon Rules ofProfessional

Conduct.

A Guide to Setting Up and Using Your Lawyer Trust Account explains when to establish a trust account and what type to use,and it provides practical information about how to open and operate a trust account-including how to correctly reconcile the trustjournal with the bank trust account statement.

Correctly protecting your clients' funds and property is critical to retaining your license to practice law in Oregon. The Professional Liability Fund has provided this handbook to aid you in your practice oflaw and to help ensure the protection ofyour clients' property. In addition,the Professional Liability Fund offers free and confidential practice management assistance through our Practice Management Advisor Program. Call the Professional Liability Fund and ask for a practice management advisor ifyou wish to take advantage ofthis service.

We hope this handbook will be ofassistance to you and that you will utilize our practice management advisors. Sincerely yours.

Jarbara S. Fishleder

PLF Director ofPersonal and Practice Management Assistance Professional Liability Fund

16037SW Upper Boones Ferry Road,Suite 300

Tigard, Oregon 97224 PO Box 231600 \ Tigard, Oregon 97281-1600

phone:503-639-69ii I tollfree:800.452.1639 fax:503.684.7250 \

ACKNOWLEDGMENTS

The Oregon State Bar Professional Liability Fund gratefully acknowledges the assistance of those who helped prepare this handbook:

Beverly Michaelis Principal Editor, Professional Liability Fund Practice Management Advisor

Sheila Blackford Professional Liability Fund Practice Management Advisor

Jennifer Meisberger Professional Liability Fund Practice Management Advisor

Hong Dao Professional Liability Fund Practice Management Advisor

Barbara S. Fishleder Professional Liability Fund Director of Personal and Practice Management Assistance

Tanya Hanson Professional Liability Fund Loss Prevention Attorney

Helen Hierschbiel Oregon State Bar Chief Executive Officer/Executive Director

Amber Hollister Oregon State Bar General Counsel

Mark Johnson Roberts Oregon State Bar Deputy General Counsel

DeAnna Shields Professional Liability Fund Loss Prevention Assistant

TABLE OF CONTENTS

I. INTRODUCTION..............................................................................................................1

II. THE IMPORTANCE OF THE LAWYER TRUST ACCOUNT..................................1 A. Ethical Obligations B. Disciplinary Action Resulting from Mismanagement of Client Funds or Property

III. WHAT IS A LAWYER TRUST ACCOUNT?................................................................2 A. IOLTA (Interest on Lawyer Trust Accounts) ? Interest to Oregon Law Foundation B. Pooled Accounts ? Interest to Each Client C. Separate Accounts for Particular Clients or Client Matters ? Interest to Each Client D. Estate or Conservatorship Accounts

IV. ESTABLISHING AN IOLTA LAWYER TRUST ACCOUNT ....................................5 A. Setting Up the IOLTA Account B. OSB Operating Regulations and Procedures C. Annual Compliance D. New Lawyer Trust Accounts E. Mandatory Trust Account Overdraft Notification Program F. Bank Charges

V. TRUST ACCOUNTING CONCEPTS.............................................................................8 A. Each Client Should Be Considered a Separate Account B. Don't Spend What You Don't Have C. Maintain an Audit Trail D. There Is No Such Thing as a Negative Balance E. Safety Measures

VI. TRUST ACCOUNTING ESSENTIALS........................................................................10 A. Property Held in the Lawyer Trust Account B. Retention of Unclaimed Client Funds and Property C. Trust Property Other Than Cash D. Maintain Records for Five Years

VII. TRUST ACCOUNTING PROCEDURES .....................................................................13

A. Opening the Trust Account

B. Trust Account Records

C. Depositing Trust Account Funds

D. Accepting Credit Cards

E. Disbursing Trust Account Funds

F. Reconciling Account Records with Monthly Bank Statements

G. Closing the Trust Account

H. Death of Sole Signatory on the Trust Account

I.

Sample Trust Account Transactions, Trust Account Trial Balances, and

Trust Account Reconciliation

VIII. FREQUENTLY ASKED TRUST ACCOUNT QUESTIONS .....................................25

APPENDIX

SAMPLE REPORT USING QUICKBOOKS?........................................................................31 SAMPLE REPORT USING QUICKEN? ................................................................................32 CHART OF ACCOUNTS ...........................................................................................................33 INDEX OF FORMS.....................................................................................................................34

I. INTRODUCTION

This handbook:

1. describes the rules for handling client funds and property; 2. provides a practical guide to creating and maintaining a trust account; and 3. gives guidance on handling client funds.

We hope this handbook will help you safeguard client funds, assure greater accountability, and reduce the number of complaints received each year relating to the maintenance of client funds. However, this handbook does not address all the intricate legal issues that might arise when handling complex legal matters involving client property.

II. THE IMPORTANCE OF THE LAWYER TRUST ACCOUNT

A. Ethical Obligations

The ethical obligations for those who set up lawyer trust accounts are rooted in the principle that a lawyer who holds funds of a client or third person in trust, even for a brief time or intermittently, has the duty as a fiduciary to safeguard and segregate those assets from the lawyer's personal and business assets. Oregon Rules of Professional Conduct (ORPC) 1.15-1 and ORPC 1.15-2 set forth the ethical duties and obligations of a lawyer who is holding client or third person funds. The duties set forth in ORPC 1.15-1 and ORPC 1.15-2 are intended to eliminate not only the actual loss of client funds but also their risk of loss while in the lawyer's possession.

Lawyers must account for every penny of these funds as long as the funds remain in their possession. This responsibility cannot be delegated, transferred, or excused by the ignorance, inattention, incompetence, or dishonesty of the lawyer or the lawyer's employees or associates. A lawyer may employ others to help carry out this duty but must provide adequate training and supervision to ensure that all ethical and legal obligations to account for those monies are being met. In re Mannis, 295 Or 594, 668 P2d 1224 (1983) (lawyer reprimanded although he was unaware employee was commingling funds).

The need to handle a client's funds with extreme care should be self-evident. Even so, cases continue to arise in which practicing lawyers, whether inadvertently or intentionally, mishandle their clients' money, thus subjecting those clients to the risk of economic hardship and seriously undermining public confidence in the legal profession. Mishandling client funds can also subject the lawyer to disciplinary action, which may result in the lawyer losing his or her license to practice law.

B. Disciplinary Action Resulting from Mismanagement of Client Funds or Property

The Oregon Supreme Court has consistently required strict compliance with the ethical rules governing client funds and property. The court has also developed a significant body of case law interpreting these rules. The rules distinguish between a charge of dishonesty by

A Guide to Setting Up and Using Your Lawyer Trust Account

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misappropriation under ORPC 8.4(a)(3) and a charge of failing to maintain funds in a trust account under ORPC 1.15-1. As the court pointed out in In re Phelps, 306 Or 508, 760 P2d 1331 (1998), conduct leading to a charge of failing to maintain client funds in trust often precedes conduct leading to a charge of dishonesty by misappropriation, but the two are not the same. A lawyer may remove money from a trust account before intentionally appropriating the money for his or her own purposes (a violation of the prohibition against dishonesty), but removal of money from a trust account does not necessarily constitute an intentional misappropriation. The difference between the two is reflected in the sanction imposed. If the Oregon State Bar (OSB) proves a lawyer guilty of dishonesty by intentionally appropriating client funds to the lawyer's own use, the sanction is disbarment. Failing to maintain funds in a trust account does not require intent, and it carries a lesser sanction. See In re Starr, 326 Or 328, 952 P2d 1017 (1998).

The disciplinary rules also require that a lawyer promptly notify a client of receipt of client funds, securities, or other properties. Client property that is not cash or another form of money must be labeled and identified upon receipt and placed in a safe, a safe deposit box, or other place of safekeeping as soon as practicable. Lawyers must also maintain complete records of all funds, securities, and other property of a client coming into the lawyer's possession and must render appropriate accounts to the client regarding the property. Failure to provide a client with a proper accounting of his or her property will result in discipline. In re Gildea, 325 Or 281, 936 P2d 975 (1997) (lawyer suspended for, among other things, failing to inventory a client's personal property, failing to tender a proper accounting of funds inadvertently placed in his personal account rather than his trust account, and failing to maintain adequate records of client's funds). A lawyer's failure to promptly pay or deliver, at a client's request, the funds, securities, or other property in the lawyer's possession to which the client is entitled will also result in discipline. See In re Arbuckle, 308 Or 135, 775 P2d 832 (1988).

III. WHAT IS A LAWYER TRUST ACCOUNT?

ORPC 1.15-1 requires a lawyer to "hold property of clients or third persons that is in a lawyer's possession separate from the lawyer's own property. Funds, including advances for costs and expenses and escrow and other funds held for another, shall be kept in a separate `Lawyer Trust Account' maintained in the jurisdiction where the lawyer's office is situated." Lawyers are required to identify trust accounts by the phrase "lawyer trust account." Lawyer trust accounts must be separate from the lawyer's business account. "A lawyer may deposit the lawyer's own funds into the lawyer trust account for the sole purpose of paying bank service charges or meeting minimum balance requirements on that account, but only in amounts necessary for those purposes." ORPC 1.15-1(b). See OSB Legal Ethics Op No 2005-145 (The rule contains no exception that allows "cushions," and the placement of such funds in a lawyer trust account would therefore constitute impermissible commingling.)

Each lawyer trust account shall be an insured, interest-bearing trust account in a financial institution selected by the lawyer or law firm in the exercise of reasonable care. ORPC 1.15-1(a); ORPC 1.15-2(h)(2). Depositor accounts, including trust accounts, are insured by the FDIC up to the standard maximum deposit insurance amount ($250,000), for each deposit insurance ownership category. If you are holding more than the insured limit in trust for any one client, you should allocate funds between multiple institutions and remind clients of the aggregate federal insurance

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A Guide to Setting Up and Using Your Lawyer Trust Account

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